On the hook for another’s fraud

In Santander (UK) plc v R.A. Legal Solicitors [2014] EWCA Civ 183, a firm of solicitors found themselves on the hook for a fraud in which they were not involved, but in which their substandard conduct had played a part. The law has always imposed a high standard on trustees but s61 of the Trustee Act 1925 has provided for breaches to be excused where the trustee acted honestly and ought fairly and reasonably to be excused. In this recent mortgage fraud case the Court of Appeal decided that the “shoddy performance” by the firm meant that they could not claim the benefit of the section.

BACKGROUND -

In May 2009 R.A. Legal were instructed by the purchaser and Santander in connection with the purchase of a residential property. The purchase price was £200,000 for which Santander were lending £150,000. Sovereign Chambers were apparently instructed by the vendor. Although a firm of solicitors in apparently good standing with the Law Society, Sovereign were in fact fraudsters. The funds disappeared from Sovereign’s client account and were not used to purchase the property. The funds were never recovered...

330 May 2014 Butterworths Journal of International Banking and Financial Law
IN
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In Practice Authors Hugh Evans and Sharon Duncan
On the hook for another’s fraud
In Santander (UK) plc v R.A. Legal Solicitors [2014] EWCA
Civ 183, a ﬁ rm of solicitors found themselves on the hook
for a fraud in which they were not involved, but in which
their substandard conduct had played a part. The law
has always imposed a high standard on trustees but s 61
of the Trustee Act 1925 has provided for breaches to be
excused where the trustee acted honestly and ought fairly
and reasonably to be excused. In this recent mortgage
fraud case the Court of Appeal decided that the “shoddy
performance” by the ﬁ rm meant that they could not claim
the beneﬁ t of the section.
BACKGROUND
■ In May 2009 R.A. Legal were instructed by the purchaser and Santander in connection with the purchase of a residential
property. Th e purchase price was £200,000 for which Santander
were lending £150,000. Sovereign Chambers were apparently
instructed by the vendor. Although a ﬁ rm of solicitors in apparently
good standing with the Law Society, Sovereign were in fact
fraudsters. Th e funds disappeared from Sovereign’s client account
and were not used to purchase the property. Th e funds were never
recovered.
THE CLAIM
Th e standard terms upon which Santander instructed R.A. Legal
required the ﬁ rm to hold Santander’s £150,000 on trust until
completion. As R.A. Legal released Santander’s advance to Sovereign
without “completion” (as deﬁ ned by the Court of Appeal in Lloyds
TSB PLC v Markandan & Uddin [2012] EWCA Civ 65) ever taking
place, Santander sued R.A. Legal for breach of that trust.
Th e judge at ﬁ rst instance found that R.A. Legal had indeed been
in breach of trust in releasing Santander’s funds, whilst genuinely
believing that completion of the purchase was to take place.
However, he also held that R.A. Legal should be relieved from
all liability by virtue of s 61 of the Trustee Act 1925. Although he
accepted that R.A. Legal’s conduct had been wanting in a number of
respects, he found that none of the conduct criticised was suﬃ ciently
connected with Santander’s loss, nor was it suﬃ ciently serious to
deprive them of the court’s discretion to relieve them of liability.
He concluded that Santander’s loss was caused by the fraud of
Sovereign, for which R.A. Legal could not fairly be held responsible.
Santander’s claim therefore failed.
Th e Court of Appeal disagreed.
To invoke s 61 the “trustee” must show ﬁ rst, that he has acted
both honestly and reasonably and secondly, that he ought fairly to
be excused.
Th e Court of Appeal referred to Davisons (Solicitors) v
Nationwide [2012] EWCA Civ 1626 which made clear that the
requirement of reasonableness did not “predicate that he has
necessarily complied with best practice in all respects”. However
“the relevant action must at least be connected with the loss for
which relief is sought …”.
Th e question of that connection caused considerable debate. Th e
Court of Appeal concluded that it was too restrictive to apply a “but
for” test which disregards conduct, however unreasonable, on the
basis that even if the solicitor had acted reasonably in that respect,
the fraud, and therefore the loss, would still have occurred. It did
accept, however, that some element of causative connection will
usually have to be shown but cautioned against an “over-mechanistic
application”.
Th e question of whether R.A. Legal ought fairly to be excused
prompted further debate; this required consideration of the eﬀ ect
of the grant of relief not only upon R.A. Legal, but also upon the
lender.
Crucially, there was no suggestion that R.A. Legal acted
otherwise than honestly. However, the Court of Appeal concluded
that the judge at ﬁ rst instance had taken too lenient a view of the
seriousness of R.A. Legal’s numerous departures from best practice.
It instead believed that R.A. Legal’s conduct had been “shoddy”,
unreasonable and suﬃ ciently connected with Santander’s loss, which
led the court to conclude that it would not be fair to excuse the ﬁ rm
from liability. Santander’s appeal was therefore allowed.
PRACTICAL TIPS
Where funds are lost to mortgage fraud, lenders should seek to
obtain their solicitors’ complete and original conveyancing ﬁ le as
soon as possible. Once the ﬁ le is to hand the steps taken within
the conveyancing process should be scrutinised. A complete
understanding of the facts and the process undertaken from the
beginning to the end of the transaction will be crucial. Any failings
which are anything other than trivial could give rise to a claim
for losses from that ﬁ rm, which in the face of lost funds and no
professional indemnity insurance aﬀ orded to the ”vendor” ﬁ rm,
could be the lender’s sole source of recovery. 
Biog Box
Hugh Evans (Partner) and Sharon Duncan (Legal Director) are
members of DLA Piper’s banking litigation team. Both act regularly for
major banks and ﬁ nancial institutions in respect of all their contentious
requirements and have considerable experience in bringing both breach
of trust and professional negligence claims for lenders.
Email: hugh.evans@dlapiper.com, sharon.duncan@dlapiper.com
DLA Piper is a global law ﬁ rm with 4,200 lawyers located in more than 30 countries throughout the Americas,
Asia Paciﬁ c, Europe and the Middle East. With one of the largest specialist banking and ﬁ nance litigation teams
in the world, we are well positioned to help companies with their legal needs, wherever, and whenever they need
it. Th e UK team, which is made up of “dedicated and experienced banking and ﬁ nance litigation practitioners”
(Chambers & Partners UK 2013), acts for hundreds of ﬁ nancial institutions, including all the major UK clearing
banks and provides advice and representation to banks, mortgage banks, building societies, ﬁ nance houses, factors
and invoice discounters and merchant acquirers as well as regulatory authorities.
JIBFL_29_5_May.indd 330 09/05/2014 14:26:08
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